This is how tax structure, revenues and expenditure looks like in South Asia.
| Country | VAT (%) | Corporate income tax (%) | Total tax rate (% of profit) |
| Maldives | 0 | 0 | 9.1 |
| Pakistan | 15 | 35 | 28.9 |
| Nepal | 13 | 20 | 34.1 |
| Afghanistan | -- | 20 | 36.4 |
| Bangladesh | 15 | 40 | 39.5 |
| Bhutan | -- | 30 | 39.8 |
| Sri Lanka | 15 | 35 | 63.7 |
| India | 12.5 | 30 | 71.5 |
Source: Doing Business Report 2009
Nepal’s tax rates are the third lowest in the SAARC region. My main point: appropriability concerns due to taxes are not a binding constraint on growth in Nepal. For my bet on infrastructure see this.
Meanwhile, this is what the revenues and expenditures (% of GDP) looks like in South Asia:
And, this is how fiscal balance looks like:
Source: ADB
The puzzle now is: despite having one of the lowest and simplest tax rates, why revenue is always low in Nepal? Tax evasion and inefficient bureaucracy to check evasion might answer a part of the question. I am still looking for the other part!
Lower taxes always does not mean higher revenue (supply-side econ???). Moreover, higher taxes also does not necessarily mean higher revenue. What comes into play? Other stuffs that affect revenue collection such as bureaucratic efficiency, corruption, level of tax evasion, depth of informal economy… What would be a good policy if first best policy options do not deliver intended outcomes? Well, second best policy options might help before going for first best policy options. This takes me to Lipsey and Lancaster’s 1956 paper and Rodrik and Hausmann’s growth diagnostics!
